Custodia Bank, Texas’ Vantage Bank issue stablecoin backed by demand deposits

Two banks have collaborated to tokenize U.S. dollar demand deposits on a permissionless public blockchain for the first time in the United States.

Wyoming-based digital asset bank Custodia Bank and Texas community bank, Vantage Bank, tokenized the deposits by issuing, transferring, and redeeming Avit stablecoins, which has been a longtime ambition of Custodia.

The transaction took place in eight stages and complied with all regulatory requirements, including those of the U.S. Bank Secrecy Act, Anti-Money Laundering, and the Treasury Department’s Office of Foreign Assets Control. 

Avit is a different kind of stablecoin

“We broke ground on the legal/regulatory front. […] Custodia looks forward to the reversal of U.S. regulatory obstacles that have stymied stablecoin innovation in recent years,” Custodia Bank CEO Caitlin Long said in a statement.

In an X thread, Long added, “@custodiabank & @Vantage_Bank just opened the door for #tradfi users that want to benefit from the global network effects of permissionless blockchains + low transaction costs, fast transaction settlement, programmability & auditability *inside* the US banking system.” 

The method of tokenization was patented by Custodia Bank in 2022, with Long listed as the lead inventor. Custodia Bank managed issuance and redemption, custody, monitoring and reconciliation using its Avit Management System.

Vantage Bank is headquartered in San Antonio and has 23 branch offices in the state and deposits totaling $4 billion. It managed the fiat reserves and provided Fedwire/ACH transfer services. The customer transferred its Avit tokens into self-custody, transacted with those tokens outside the banking system, and then transferred its Avit tokens back to Custodia Bank for redemption as U.S. dollar demand deposits.

All of the activities took place on the Ethereum mainnet using the ERC-20 standard.

Its stablecoin makes Custodia Bank problematic for the Fed

The issuance of Avit required different documentation, policies, and procedures from other stablecoin issuers, and the banks worked closely with their respective regulators on them. 

Custodia Bank was chartered by the Wyoming State Banking Board as a special-purpose depository institution in 2020. As such, its fiat deposits are 100% reserved, not fractionally reserved at 10% as is typical for banks.

The bank was originally called Avanti Bank. Avit was part of its business plan from its inception. At the time, the bank called Avit a “stablecoin disruptor.” Avit is backed by demand deposits, rather than reserve currency, as is the case for typical stablecoins. 

The Federal Reserve Board denied Custodia Bank membership in the Federal Reserve system in January 2023. Without a master account with the Fed, the bank was unable to carry out several important functions. 

The Fed said Custodia Bank sought to engage “in novel and untested crypto activities that include issuing a crypto asset on open, public, and/or decentralized networks.” It considered the bank’s plans risky.

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